End-to-end IT services provides a framework that allows IT the ability to offer greater cost variability based on business partners’ consumption patterns. However, offering end-to-end IT services to business units operating in different geographies, with diverse needs and requirements, can increase service customization demands and overall enterprise costs. To manage these demands for service customization IT can use pricing to nudge business partners towards more standardized services.
Adopting standard pricing method (i.e. pricing by user or revenue regardless of service usage) and charging flat service rates across heterogeneous business units can lead to organizational tension, unfair pricing, and increase overall enterprise costs. The key challenges in adopting a standard service pricing model include:
- “Unfair” service pricing: Under-charging groups of service consumers at the expense of other groups leads to organizational tension over pricing subsidies for groups with high consumption or specialized needs.
- Limited business partner cost consciousness: Few incentives for business partners to curb service costs or consumption of truly unnecessary customized services.
An IT organization from a leading company in the oil and gas industry helps its business partners better manage service costs without adding unnecessary accounting complexity. They selectively apply a “pay-per-use” model for services where the costs are highly dependent on niche group needs or usage patterns. Their approach includes the following three key steps:
Adopt a 60:40 approach to customized service components: Use separate charging mechanisms for standard service components and for components that vary greatly in usage or quality needs. Roughly sixty percent of the service is charged as a mandatory global standard offering at a flatter price, and the remainder is charged as a premium or usage-based offering. For the premium or variably priced offerings, business partners are charged on a pay-per-use model.
Define premium and variable service offerings: The company defines premium service offerings as those where:
- The needs of niche user populations or roles would unfairly raise costs for other consumers; or
- Local regulations differ significantly from global standards; or
- Usage or quality is highly controllable and a significant driver of service costs; or
- Local costs of resources far exceed organizational average.
Maintain a service cost leader board: The company also uses cost leader boards to identify which business partners are most effective at driving down their service costs. They do this to promote cost reduction idea sharing and internal cost consciousness.
The model above helps business partners think carefully about their real needs for service customizations and variable cost add-ons. Most of the time, it leads to improved clarity on cost drivers and decreased demand for customizations. When they do have business partners insist on highly customized offerings, though, they can now be confident that those customizations are genuinely needed.
We profile specific examples on flexible service cost allocation and pricing in our study, The New Model for IT Service Delivery. To learn more about service cost allocation and pricing in an end-to-end IT services model, visit our Funding Models Topic Center .